Reduce the Hurdles to Private Investment in Infrastructure

"How do you know macroeconomists have a sense of humor? They use decimal points."


Olivier Le Queinec / Dreamstime

The Congressional Budget Office has a new report looking at the return of federal investment in transportation and research. The bottom line is that the return is not so much as the private-sector investment. So rather than invest more money in federal investments, let's get rid of all the federal policies that stop the private sector from doing the investing.

First, let's look at the CBO report. Salim Furth of the Heritage Foundation explained in an email to me how this CBO report deserves much credit for "diligently following Congress' new requirement that CBO include macroeconomic feedback effects in its evaluations of major fiscal policy changes." He continued: "This dynamic approach is a lot more work than the alternative, and Director Keith Hall is quietly making CBO more transparent. He's more open to criticism, but that's a benefit in the long run, since it will compel CBO to constantly improve its modeling."

"CBO is very honest about its limitations," Furth added. He noted, for instance, that it admits we know very little about the economic impact of investment in education and research because we lack sufficient empirical evidence. The report also acknowledges major uncertainty in macroeconomic valuation, which leads to a wide range of estimates—sometimes negative, sometimes positive—about the impact of deficit-funded federal investment on the incomes of Americans.

Then there are the things that the CBO says we know. Based on existing literature, the CBO estimates that a 1 percent increase in "public physical capital"—such as highways or airports—leads to 0.06 percent economic growth. It also estimates that though there are positive effects of federal investment on transportation spending, there are also negative ones, mostly because of the 33 cents in private investment decline for every deficit-funded federal dollar spent. For this reason—and for better or worse—the CBO also uses the transportation estimate for federal investment in education and research.

When reading these numbers, I am reminded of a joke about economic estimates by my former colleague Russ Roberts—a fellow at the Hoover Institution. It goes like this: "How do you know macroeconomists have a sense of humor? They use decimal points."

Leaving aside the question of how reliable these estimates really are, the CBO tells us that "productive federal investment has an average annual rate of return of about 5 percent, or half of the agency's estimate of the average rate of return on private investment." In other words, private-sector investments generate more return than those made by the government.

Though directionally correct, this finding is only a modest bow toward reality. There is a large body of research showing how federal investment in transportation is often misallocated because of political pressure, is used inefficiently because the supply and demand are not guided by market prices, and suffers from costly systemic overruns. These problems, in addition to the fact that federal investments often give priority to union labor and follow inefficient requirements, mean that federal investments often have a negative return, not just a lower return.

One important policy implication of the CBO's finding (that the returns from private investments tend to be higher than for government investments) is that to boost economic growth, policymakers should reduce hurdles to private investment in infrastructure—for example, airports. Policymakers should cut marginal tax rates and allow for capital expensing to increase returns for infrastructure investment. They should end federal subsidies to state governments for infrastructure to spur state privatization. They should cut federal regulations that raise costs for building state infrastructure, such as the Davis-Bacon labor rules, and they should cut regulations that restrict state privatization.

And, as the Cato Institute's Chris Edwards notes, they should repeal the tax exemption on municipal bond interest, which stacks the deck against private investment. At the same time, state and local policymakers should cut property taxes on machinery and equipment, which are a major deterrent for businesses to build new factories in many states.


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  2. Ot, I’m out traveling and therefore am a bit out of the news cycle, but I hear tell the biggest news going is Democrats are performing some kind of sit in in their own office. A little strange, but ok. I thought the point of a sit in was to do it in someone else’s space as a kind of disruption.

    Anyhoo, I’m impressed by their commitment. Shame they couldn’t do this sit in for the Patriot act or some such thing.

    1. It’s incredible. Civil rights “icons” demonstrating in order disorder to take away our civil rights.

      1. It is catered.
        Does this make a parody of the Civil Rights movement?
        I’m hoping they light their bedding on fire and throw it at the guards.


    2. I am double pissed about that. I hate to see any kind of gun control efforts and also why do the R’s never show that kind of resolve?

  3. Thank reason that Gay Jay didn’t have to answer any questions on roads at the CNN town hall last night.

  4. What? And lose all the sweet, sweet cronyism?

  5. The entire stretch of Hwy 190 between Opelousas and Baton Rouge was a construction zone for over 25 years. The speed limit was reduced to 45mph and became a gold mine for speeding fines and no doubt the contracts for construction were all cronys. That is just the first one that pops in my head but I have seen that over and over and over.

    It isnt possible to make a poorer investment than having government spend money on infrastructure.

    1. It isnt possible to make a poorer investment than having government spend money on infrastructure.

      But they’re the only ones who can make roads! There wouldn’t be a single controlled access freeway in this country if not for the Federal government! You’d have to pay tolls to travel!

      … are all actual things people have said

  6. Look. It’s a moral issue involving profits. Private investment leads to immoral profits for rich people, without any oversight by The People (the government). Government investment, even if it is less efficient and less productive, is done by The People. By us. We, the People. The government. Not by greedy corporations that only care about profits. That’s why government investment is always better than private investment. Because it’s us, we the people, not the rich and the corporations. The rich and the corporations are the enemy. They steal from us with their profits. Only government is fair, good, and just. Because it is us. The People.

  7. Roadz and Somalia. I’ll leave the rest to someone more witty than I.

    But one thing I will give to the Germans are their roads:

    A privatized toll autobahn running along side major state highways would be awesome. I would use this as alternative to flying Southwest for traveling between cities. An hour flight one way takes a total of at least 4 hours, sometimes up to 5 hours, if there’s traffic to/from the airport and long lines (always in the morning)

  8. Why couldn’t you pay for the maintenance of some roads via selling advertising and sponsorship rights? For example, the beltway in Washington is horrible. It is also one of the most well known and well traveled roads in America. If some corporation will spend tens of millions of dollars to have their name attached to a football stadium, why wouldn’t they do the same to have ti attached to a highway? Let some corporation get the naming rights to the beltway in return for them maintaining it. They would have every incentive to maintain it well since no one would want their name associated with a shitty road.

    You couldn’t of course do all roads like that. But you could do a few of them and a few bridges like that I bet.

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